No reflective loss: The English approach reconsidered

JurisdictionSouth Africa
Date31 March 2021
AuthorRahmani, A.
Published date31 March 2021
Lecturer in Commercial Law, Al-Maktoum College of Higher Education
Dundee, Scotland, UK
A company shareholder should have no difficulty in commencing
a claim to recover the loss suffered due to a wrong done to their
personal property. The right to the protection of property is a
fundamental human right in English law. A wronged person whose
property right is infringed will have the right to commence legal
proceedings against wrongdoers. However, in the company context,
the exercise of a shareholder’s right of action may conflict with the
company’s right of action where the loss sought is reflective. The
English company law’s arrangement has been that a shareholder’s
action is exceptional beyond which it will routinely be barred through
the principle of the ‘no reflective loss’. Where company’s loss and the
shareholders’ loss are reflectively linked, then the company’s action
prevails against the shareholder action. This paper argues that the
two actions should swap places in law. Shareholder action should be
recognised as a general principle of law while it is barred exceptionally
in circumstances where stronger policy considerations such as the
observation of the corporate autonomy are to be prioritised. This
article refers to company law in the UK.
Keywords: reflective loss, shareholder remedies, shareholder action,
unfairly prejudicial remedy, corporate autonomy, corporate loss.
This paper investigates the company shareholders’ right to legal
action in respect of reflective loss. The general law of torts in
England provides for a wronged party’s right, no matter natural
or legal, to initiate a legal action against the wrongdoer in a court
* LLB LLM (Islamic Private Law) (Shahid Beheshti, Tehran) Graduate Diploma in
Law (Northumbria) PhD (Company Law) (Glasgow).
(2020) 6(2) JCCL&P 1
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of law for the recovery of the loss suffered.1 The provision applies
in a straightforward manner where the wronged party is a natural
person. A wronged individual can pursue the wrongdoer in a court
of law for the recovery of the loss suffered and is granted a remedy
subject to an establishment of the elements of a successful claim in
tort.2 The wrong is done to the individual, the loss is his and the
parties to the claim are simply two entities, the wrongdoer/s and
the wronged person/s, so no additional or unusual complication.
It is not, however, so straightforward where the wronged party is
a legal person, to be specific, a company. Where a company incurs
loss due to a wrong done to it, the company’s shareholders may also
incur loss reflectively. Both the company and the shareholders may
have been wronged, the loss could equally be theirs and the claim
may involve three parties, wrongdoer/s, directly wronged person/s
(company), and indirectly wronged person/s (shareholders). In
company context, therefore, the wronged party could either be the
company or the shareholder, or both, as one same wrong may cause
loss to both the company and the shareholders.
While principally every wronged party including a company
shareholder should have the legal right of action for the recovery of
loss suffered, a wronged shareholder may only exceptionally and in
limited circumstances be allowed to initiate a personal claim for the
recovery of his/her loss due to the operation of the ‘no reflective loss’
principle. When the loss is reflective, a wronged shareholder has no
right of action against the wrongdoer but exceptionally. Instead, it
will be the wronged company itself that can pursue the wrongdoer
for the recovery of the loss. It would, however, not follow that a
shareholder’s reflective loss is irrecoverable. Shareholders may still
recover their reflective loss through a corporate recovery of the loss.
If the wronged company takes a legal action against the wrongdoer
and successfully recovers its loss, then shareholders’ loss may also be
recovered reflectively. Where the corporate loss is not recovered, a
wronged shareholder’s personal action for reflective loss will still be
barred due to the operation of the ‘no reflective loss’ principle.
There are two central questions in this paper: why is a wronged
shareholder generally barred from actioning in respect of reflective
loss, and when may he/she initiate a personal legal action to
1 Donoghue v Stevenson 1932 AC 562.
2 Principally, three elements of a successful claim in tort are to be established by the
pursuer: civil wrong, loss, and causation. Donoghue ibid; Bourhill v Young 1943 AC
92; Muir v Glasgow Corporation 1943 SC (HL) 3; Bolton v Stone 1951 AC 850; Paris v
Stepney Borough Council 1951 AC 367; Hughes v Lord Advocate 1963 AC 837; Home
Office v Dorset Yacht Co Ltd 1970 AC 1004; Nettleship v Weston 1971 2 QB 691;
Maloco v Littlewoods 1987 AC 241; Hill v Chief Constable of West Yorkshire 1989 AC
53; Wilson v Chief Constable of Lothian & Borders 1999 ScotCS 99.
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recover it? These are important questions in terms of setting up an
efficient scheme of corporate governance in companies. Most of the
world’s companies’ laws accommodate shareholders at the centre
of corporate governance so as to encourage corporate financing.3
Shareholders should have the legal right of action in respect of
their investment, as they typically supply a company with most
of the finance required for its business.4 Shareholder action is seen
desirable and necessary because it is a non-separable part of every
relationship which involves a person who entrusts his money
to the care of another person.5 It encourages public financing in
corporations because it signals to potential investors that they will be
given adequate legal protection for their investment.6 The absence of
shareholder action could discourage likely investors from investing
their capital in companies and might undermine one of the main
purposes of a company as an institution, in that Posner7 and others8
have suggested that a company is primarily a device introduced by
law and business practice to solve problems encountered in raising
substantial amounts of capital.9 At the same time a company is seen
as a separate person in law that can as a proper plaintiff take action
in relation to any claim against individuals who have committed a
wrong against it.10 A shareholder’s personal action could therefore
conflict with the corporate autonomy and the rule of majority in
corporations and should be barred by the courts accordingly. By
investigating the above questions, the paper attempts to suggest
3 Mathias M Siems Convergence in Shareholder Law (2008) 149.
4 Mark J Roe ‘The shareholder wealth maximization norm and industrial
organization’ (2001) 149 University of Pennsylvania Law Review 2063; Lynn
A Stout ‘Bad and not-so-bad arguments for shareholder primacy’ (2002) 75
Southern California Law Review 1189; Sheldon Leader ‘Private property and
corporate governance: Part I: Defining the interests’ in Fiona Macmillan Patfield
(ed) Perspectives on Company Law (1995) 94–96; LCB Gower Principles of Modern
Company Law 4 ed (1979) 553–4; Henry G Manne ‘Mergers and the market for
corporate control’ (1965) 73 Journal of Political Economy 110; Henry G Manne
‘Our two corporation systems’ (1967) 53 Virginia Law Review 259; John H Farrar
Company Law (1991) 319.
5 Louis Lowenstein ‘Shareholder voting rights: A response to Sec. Rule 19c-4 and
to Professor Gilson’ (1989) 89 Columbia Law Review 983–4; Eilis Ferran Company
Law and Corporate Finance (1999) 239.
6 Julien Chaisse & Lisa Zhuoyue Li ‘Shareholder protection reloaded: Redesigning
the matrix of shareholder claims for reflective loss’ (2016) 52 Stan J Int’l L 51; Vera
Korzun ‘Shareholder claims for reflective loss: how international investment law
changes corporate law and governance’ (2018) 40 U Pa J Int’l L 189; Lowenstein
ibid at 983; Thomas Lee Hazen ‘Silencing the shareholders’ voice’ (2002) 80 North
Carolina Law Review 1917; Ferran ibid at 246.
7 Richard A Posner Economic Analysis of Law (1992) 392.
8 John H Farrar Company Law (1985) 6.
9 Brian R Cheffins ‘Minority shareholders and corporate governance’ (2000) 21 The
Company Lawyer) 41.
10 Korzun op cit note 6; See section IV below.
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